U.S. commercial real estate recovering at a slower pace

Positive underlying fundamentals continue to support all of the major commercial real estate sectors, but a slowdown in job creation and ongoing tight loan availability has tempered growth in some areas, according to the National Association of Realtors quarterly commercial real estate forecast.

Lawrence Yun, NAR chief economist, said there is mixed results among the commercial sectors. “Job creation in the second quarter was about half of what we saw in the first quarter, which is moderating demand in the office sector,” he said. “Industrial and warehouse space is holding on better because imports and exports have advanced. While exports to Europe generally are down, trade has been robust with India, China and other Asian nations, along with Brazil, Mexico and our strongest trading partner — Canada.”

Although still positive, dampened demand is slightly moderating rent growth with the exception of the multifamily market. “Sharply higher demand for apartments is causing rents to rise at faster rates,” Yun said. “A return to normal household formation will mean even lower vacancy rates and higher rents in the future.”

The current commercial real estate cycle has been driven by shifts in demand without an oversupply of new construction. “The difficulty small businesses have in getting commercial real estate loans for leasing or purchase is keeping a lid on demand,” Yun explained. “Multifamily is the only commercial sector with a notable growth in new space, with some lending provided through government loans.”

With the exception of multifamily, vacancy rates remain above historic averages seen since 1999. Over that timeframe the typical vacancy rate has been 14.4 per cent for the office market, 10.1 per cent in industrial, 8.1 per cent for retail and 5.8 per cent in multifamily.

Vacancy rates are marginally declining and rents are modestly rising in all of the sectors, but significant changes in the outlook are unlikely before the end of the year. Many corporate decisions on spending and job hiring are on hold given uncertainty over the upcoming elections, whether Congress will effectively avoid a “fiscal cliff,” and unsettled issues such as health care and banking/financial regulations.

“Overall companies hold plentiful cash reserves, but they are hesitant to hire without clarity over how these outstanding issues will impact the bottom line,” Yun said.

“Commercial real estate gains could be thwarted if lending from small and community banks dry up from excessive regulatory compliance costs, and if international big-bank capital rules are applied to smaller lending institutions,” Yun added.

NAR’s latest Commercial Real Estate Outlook offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc. a source of commercial real estate performance information.

Office Markets

Vacancy rates in the office sector are expected to fall from an estimated 16.1 per cent in the third quarter to 15.6 per cent in the third quarter of 2013.

The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.4 per cent; New York City, at 10.0 per cent; and New Orleans, 12.8 per cent.

Office rent is projected to increase 2.0 per cent this year and 2.6 per cent in 2013. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, should be 24.1 million square feet in 2012 and 47.8 million next year.

Industrial Markets

Industrial vacancy rates are forecast to decline from 10.7 per cent in the third quarter of this year to 10.5 per cent in the third quarter of 2013.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.6 per cent; Los Angeles, 4.8 per cent; and Miami at 6.8 per cent.

Annual industrial rent is likely to rise 1.7 per cent in 2012 and 2.4 per cent next year. Net absorption of industrial space nationally is seen at 59.8 million square feet this year and 67.2 million in 2013.

Retail Markets

Retail vacancy rates are projected to decline from 10.9 per cent in the third quarter to 10.7 per cent in the third quarter of 2013.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.8 per cent; Fairfield County, Conn., 3.9 per cent; and Long Island, N.Y., and Orange County, Calif., both at 5.3 per cent.

Average retail rent is forecast to rise 0.8 per cent this year and 1.3 per cent in 2013. Net absorption of retail space should be 10.3 million square feet this year and 20.1 million in 2013.

Multifamily Markets

The apartment rental market — multifamily housing — is expected to see vacancy rates drop from 4.3 per cent in the third quarter to 4.2 per cent in the third quarter of 2013; vacancy rates below 5 per cent generally are considered a landlord’s market with demand justifying higher rents.

Areas with the lowest multifamily vacancy rates currently are Portland, Ore., at 2.0 per cent; New York City and Minneapolis, both at 2.2 per cent; and New Haven, Conn., and San Jose, Calif., both at 2.4 per cent.

Average apartment rent is likely to increase 4.1 per cent in 2012 and another 4.4 per cent next year. Multifamily net absorption should be 219,300 units this year and 236,600 in 2013.

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